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POLICY BRIEF: The Limited Effects of Unemployment Benefit Extensions

KEY POLICY INSIGHT: After the Great Recession left millions of Americans out of work, many received extended unemployment insurance benefits. While some accused the extra aid of slowing economic recovery, the latest research finds no evidence that increasing the duration of unemployment benefits leads to large negative effects on the economy.

Extending Unemployment Insurance

The economic slump of 2007 was only the beginning of a challenging period for the U.S. job market. Long-term unemployment became a problem that persisted for years even after the Great Recession ended.

The cause of the slow recovery was debatable but some policymakers thought they knew the culprit: the jobless had it too easy. By their account, extending unemployment benefits encouraged people to favor leisure over work.

The latest research suggests these critics were wrong. Even if individual beneficiaries of extended unemployment checks became more selective about what jobs they would accept, the overall economy didn’t suffer much from their choices.

Extending unemployment benefits added at most a wafer-thin third of a percentage point to a roughly 5 percentage point increase in the unemployment rate during the last recession.

“The punchline is we found near zero effect,” said University of Minnesota economist Loukas Karabarbounis. He and Gabriel Chodorow-Reich, a Harvard University economist, recently completed an in-depth review of the consequences of extended unemployment benefits.

Indeed, many people who qualify don’t actually collect the benefits.

“Suppose you have 100 unemployed, how many actually receive their benefits?” Karabarbounis said. “The answer is roughly 40 percent.”

Some of those who don’t collect may not qualify, for one reason or another.

“A large fraction of them are eligible but don’t actually go to pick up their checks,” he said. “Why? Maybe they are bored or lazy, misinformed, or expect to get a job soon. We don’t know for sure.”

Karabarbounis added, “That doesn’t mean the benefits aren’t important. To some people they’re very important.”

He also explained that the large fraction of the jobless passing up unemployment benefits undermines the argument that extending benefits led to a widespread increase in unfilled job openings or other adverse economic effects.

Extending the Great Recession

From the start of the downturn, in December 2007, to the end, in June 2009, the nation’s unemployment rate soared from 5 percent to 9.5 percent.

To many, the recovery was almost as miserable as the recession. Nearly seven years passed before the jobless rate returned to pre-recession levels in May 2016.

The standard unemployment benefit – 26 weeks of checks financed by state unemployment insurance plans – ran out long before the job market rebounded.

Congress responded with federal emergency benefits that they kept extending for over a five-year period.

By the time the program expired, at the end of 2013, extended benefits had endured 20 months longer than the aftermath of any earlier recession. Some collected benefits for up to 99 weeks.

The increased cost of unemployment benefits sparked heated debates. Advocates of extended benefits argued that the program propped up state economies. Opponents claimed that extensions undermined job growth.

At the end of 2013, Congress let a four-year federally financed effort to extend unemployment benefits lapse. The move came even though more than 30 percent of the nation’s jobless at the time had been without work for more than 27 weeks. Some 3.1 million long-term unemployed ultimately were left to fend for themselves.

The loss of extended unemployment insurance benefits was a sharp blow to idled workers in Florida, New Jersey, Illinois, and New Mexico, all states where 40 percent or more of the unemployed had been without jobs for nine months.

Opponents of continuing the extended unemployment insurance payments argued that the program was a cost without offsetting savings elsewhere in the federal budget. They also maintained the worst was over. Indeed, unemployed who were out of jobs for more than 27 weeks in 2010 hit an all-time record of more than 45 percent – a share that fell by a third three years later.

They maintained that if the unemployed are straining to pay their bills, they’ll make looking for work a full-time job. But when they’re propped up by unemployment benefits, they’ll let opportunities pass them by.

Extending State Data Comparisons

Karabarbounis and Chodorow-Reich devised a novel real-world experiment to test that premise. Teasing out the answers was no easy task. After all, when unemployment levels are rising throughout the nation, how could economists know whether prolonged unemployment checks played a part?

In the face of the worst economic setbacks in 75 years, in 2008 Congress passed an emergency federal unemployment benefit plan. In states with a jobless rate of 6 percent or higher, idled workers initially qualified for an additional 28 weeks of benefits.

To measure the economic consequences for states above – or below – the level that qualified for extra aid, Karabarbounis and Chodorow-Reich hit upon a novel idea.

Small changes in unemployment rates led to big increases in extended jobless benefits. But sometimes the statistical agency made mistakes in estimating state unemployment levels. In some cases, those errors meant some states that should have qualified for extra jobless benefits abruptly stopped sending checks by the thousands.

For example, in April 2013, the jobless in Louisiana qualified for the 40 weeks of benefits – the standard 26 weeks, plus an additional 14 weeks of federal aid. The average of the Louisiana’s unemployment rate then stood at 5.9 percent.

In reality, the burden of unemployment in Louisiana and Wisconsin were the actually same. It would take two years for the statistical agency to discover the statistical disparity was an illusion. Both states, in reality, had identical unemployment rates – 6.9 percent in April 2013.

Transitory mistakes in the collection and evaluation of jobless data, not uncommon, led to underestimates in the actual unemployment rate in Louisiana.

That error led to an insight for researchers: If opponents of extending unemployment benefits were right, the job market in Wisconsin should have been slower to recover than in Louisiana.

In this real-world experiment, both states unknowingly had the same proportion of unemployed when extended unemployment benefits kicked in for Wisconsin but not forLouisiana.

Wisconsin’s jobless should have been in no hurry to look for work while the benefits checks kept rolling in. In contrast, Louisiana’s unemployed would have to scramble for work 14 weeks sooner, unable to collect more than three months of extra benefits.

What actually happened? The revised (more accurate) unemployment rates in both states declined by about 0.2 percentage points between April and June in 2013.

The unemployed sought – and found – jobs at about the same pace in both states. Extended jobless benefits were not a cushion that kept people sitting on their couches.

“Similar to the example of Louisiana and Wisconsin in April 2013, during the period 1996-2015 we find more than 600 state-month cases in which the duration of benefits using the revised data differs from the actual duration of benefits,” the authors wrote in their paper.

A thorough-going analysis of those widespread errors in measuring unemployment gave researchers the opportunity to generalize the findings they found comparing Louisiana and Wisconsin.

Extending Policy Implications

Their conclusions held firm. The difference in economic performance between states that offered extended unemployment benefits and those that didn’t was negligible.

While extended unemployment benefits may be costly for the federal government, individual benefit checks are not large enough to make up for lost paychecks.

Currently unemployment checks in Minnesota top out at $683. In Wisconsin, the maximum comes to $370. In Louisiana, the most an unemployed worker can expect is $247.

Come the next recession, these findings may help to transform the debate over extended unemployment benefits toward the empirical findings of past experiences.